The Next Decade of EU Trade Policy: Confronting Global Challenges?

On 27 January 2012, the European Commission published a Communication ‘Trade, Growth and Development: Tailoring trade and investment policy for those countries most in need’. It is the first on the topic since 2002, and is intended to set out a direction of travel for the next decade. 

The communication (a) reviews changes in the world (‘the great reshuffle’) , (b) summarises what the EU has achieved over the past decade in terms of trade and investment policy with respect to developing countries, and (c) lays out an agenda to 2020 or so, for the EU itself and within the multilateral context. There is also a short section on what developing countries must do (see box 1).

In response, the Council issued its conclusions on 16 March, stating that the Council is committed to 1) promoting a multilateral agenda for trade and development (e.g. pursuing the Doha Round and the LDC package); 2) promoting market access for developing countries (e.g. the Generalised System of Preferences (GSP), Economic Partnership Agreements); 3) working towards sustainable development through a green economy (e.g. liberalisation of green goods and services, financing 
and public–private partnerships); and 4) developing more focused, targeted and coordinated Aid for Trade (AfT).

Because of the potentially wide-ranging impact of the Communication, framing trade policy for a decade amidst the middle of large global shocks, a set of 18 essays (1) from the world’s leading trade and development experts set out to discuss the main issues covered. These essays suggest there is much to celebrate in the EU document: it identifies a number of global challenges in what it calls a ‘reshuffle'; it recognises important dilemmas, such as whether and how to differentiate among
countries in a heterogeneous world and how to use trade and investment policy to address climate change and other environmental problems; and formulates good solutions such as targeted ‘aid for trade'. It is a pity though that some good solutions and other possible offers in the Communication were narrowed down significantly in the Council conclusions.

However, the essays also flag up a series of major concerns, which we have grouped into five categories:

There is a major concern that the EU is moving towards protectionism

A major worry expressed by several authors is that the EU will retreat into protectionism (e.g. vis-à-vis BRICs) in the range of trade-related economic policies. For example, the first reform of the EU's generalised system of preferences (GSP) in 30 years, to be implemented in 2014, will see richer developing countries (e.g. India or Vietnam) lose trade concessions of up to €257 million each year. Clearly, the GSP reform is likely to impose more trade barriers on a range of products and countries when they are not benefiting from a reciprocal FTA with the EU. And the EU claims that this will be to the benefit of the poorest developing countries, but instead it is more likely that richer nations such as Switzerland and the US will reap the rewards, while EU consumers will lose out and the poorest countries will hardly gain anything.

At the same time, developing countries including Kenya, Ghana, Botswana, Namibia and Swaziland could lose €50m each year to the EU, if they do not sign up to the EU's Economic Partnership Agreements (EPAs). This would increase to €76m if Cameroon and Côte d'Ivoire fail to ratify their respective EPA. The planned date for the implementation of this regulation is 2014, although the International Trade Committee (INTA) of the European Parliament voted in June to extend the deadline to 2016 (2).

And such threats are not confined to tariffs. The Commission has issued a proposal to close government procurement markets to firms from countries that exclude European firms. And an EU member state argued this July for the re-introduction of export subsidies for dairy products. Is this part of a trend in protectionist measures that many of us feared would happen in difficult economic times? Shouldn’t the response relate to how to make use of growing markets outside the EU?

There is no clear strategy behind the EU’s approach towards differentiation and is currently applied largely on an ad hoc basis

There is a clear danger that differentiation in the area of trade will be applied without consideration of economic principles and without a clear strategy that brings together the various fields in which differentiation can be applied: aid, trade, climate change, etc. For example, trade theory suggests lower tariffs (including those applied to emerging powers) are better, and differentiation is a distraction. On the other hand, it seems difficult to defend (on a ‘needs’ basis) aid to G20 countries
at the end of the decade. Moreover, environmental changes are in the hands of emerging powers, which should increasingly, and proportionally to their development stage, contribute to finding solutions to climate change and natural resource scarcity issues. 

The Communication neglects the importance of non-trade policies for developing country growth and fails in its duty to promote Policy Coherence for Development (PCD)

There is a missed opportunity to make non-trade policies coherent with development goals. The obvious example is the Common Agricultural Policy (CAP), which is clearly at odds with development goals. There are a myriad of ways to achieve the stated goals of the CAP without having to pay economically inefficient and environmentally harmful subsidies to a selected group of European farmers. There seems to be no sense of urgency in the need for step changes in PCD.

The EU is taking the wrong approach to the role of trade in tackling global problems

The EU takes a defensive position on the role of trade in tackling global challenges like climate change and food security, even (threatening to) imposing trade barriers for green purposes. In fact, the opposite needs to occur: free trade can help countries reap the benefits of economies of scale in green industries and can provide access to water, land and hence food, as long as there are no trade (tariff and non-tariff) barriers.

Trade policy has little meaning without being embedded in and linked to policies for growth

Trade and investment (policies) do not have a one-to-one causal relationship with growth, and seem largely irrelevant in, for example, the Pacific. Instead, the EU should be problem-focused and examine how it can contribute, with what type of support. It could for instance support developing country initiatives, policies and institutions for good governance, industrialisation and diversification, regional integration efforts and systems to manage AfT, as these are required to make EU trade and investment policies work for development.

So trade is not the single panacea for one single challenge, but it helps to achieve a range of policy objectives, and its role will vary enormously from one context to the next.

In addition to the above five points, there are a number of issues that will become urgent policy issues for the EU in 2014 unless they are contained. For example, what will happen to African, Caribbean and Pacific (ACP) countries that have not signed up to an EPA when they lose trade preferences, or current GSP beneficiaries when they lose preferences? Or what will happen when we realise that the CAP has not been reformed despite it being economically inefficient, financially
expensive and not environmentally sustainable, with alternatives available. These are all issues that should become clearer before 2015, the next milestone for the EU’s trade strategy.

A moment of reckoning will arrive in 2015 when the Commission will need to report to the Council on progress on the Communication and Council conclusions. The interested observer may wish to build a checklist of concerns. Our checklist for the report will include:

• Has the EU been able to fight protectionism and not give in to protectionist forces?
• Has the EU developed an overarching strategy on differentiation?
• Has the EU succeeded in placing trade and related policies as part of policy coherence for development and delivered step changes in PCD?
• Has the EU mainstreamed trade throughout its work on climate change and natural resource scarcity?
• Has the EU managed to better link trade policy to a country’s growth strategy?

Has the approach towards EPAs, GSP and the CAP been satisfactory and not harmed relationships with developing countries?

The EU needs to ensure that the next decade of trade policy is fit to confront 21st-century trade issues, rather than protecting policies – such as the CAP – that can work counter to growth and development, both in developing countries and in the EU.

This article is based on the report he edited: “The next decade of EU trade policy: confronting global challenges?” It was published by the European Development Cooperation Strengthening Programme at ODI and can be accessed at: http://www.odi.org.uk/resources/details.asp?id=6693&title=eu-tradepolicy-international-development-global-challenges#downloads. Essay contributors included Yurendra Basnett, Vishnu Bassant, Sanoussi Bilal, Derek Brien, Nicola Cantore, Bipul Chatterjee, Fredrik Erixon, Stephany Griffith-Jones, Siân Herbert, Ken Heydon, Jodie Keane, Christian Kingombe, Federico Lupo Pasino, Ali Mansoor, Pradeep Mehta, Patrick Messerlin, Oliver Morrissey, Salomon Samen, Nikunj Soni, Chris Stevens and Dirk Willem te Velde. 

Dr Dirk Willem te Velde is Head of the International Economic Development Group, in ODI, London. 

Footnotes

1.  These can be accessed here: www.odi.org.uk/resources/docs/7727.pdf
2. European Parliament. Press Release. Developing countries need more time to ratify new EU trade agreements, say MEPs. 22 June 2012.

This article was published in GREAT Insights Volume 1, Issue 6 (August 2012).